Roth IRA Fund Options from Ally

Ally Financial Inc. (ALLY) is a digital financial services company and full-service automotive finance provider. The company provides mortgage and personal lending; consumer credit cards; savings, money market, and checking accounts; certificates of deposit (CDs); and securities brokerage and investment advisory services.

Through its Ally Bank consumer banking business, it serves about 2.54 million deposit customers. Its Ally Invest provides brokerage services, including self-directed and managed investment products, to roughly 518,000 customer accounts with $13.5 billion in assets.

Ally was founded in 1919 as GMAC, a division of General Motors Co. (GM). The company initially helped automotive dealers to finance and maintain inventory. In subsequent decades, the company expanded to provide a host of other financial services.

Ally now offers investors access to more than 2,000 exchange-traded funds (ETFs), a number confirmed by the company. These ETFs come from a variety of partner providers, including Vanguard, iShares, and WisdomTree. Ally does not provide its own proprietary family of funds. Ally also offers a robo-advisory service that gives automated, algorithm-driven financial planning with little to no human supervision.

Investors in the United States have access to several tax-advantaged saving plans offered by a broad range of other financial services companies, including 401(k)s, individual retirement accounts (IRAs), and Roth IRAs. The main difference between a Roth IRA and a traditional IRA is that the former is funded with after-tax dollars. This means that contributions to Roth IRAs are not tax deductible, as they are with traditional IRAs. But unlike a traditional IRA, where withdrawn funds are taxed, a Roth IRA allows investors to withdraw funds tax-free.

All data in the bullet point lists for each fund below are as of March 31, 2022, unless otherwise indicated.

Vanguard Total Stock Market ETF (VTI)

• Expense Ratio: 0.03% (as of April 29, 2021)
• Assets Under Management: $292.9 billion (August 16, 2022)
• One-Year Trailing Total Return: -4.94% (as of August 15, 2022)
• 12-Month Trailing (TTM) Yield: 1.47% (August 16, 2022)
• Inception Date: May 24, 2001

VTI tracks the performance of the CRSP U.S. Total Market Index. The index is made up of thousands of stocks representing the full market capitalization spectrum. VTI is a comprehensive, broad, and diversified fund that represents roughly 100% of the U.S. investable equity market.

VTI’s managers are Gerard O’Reilly and Walter Nejman. O’Reilly has advised the fund since 2001 and Nejman since 2016.

The ETF has 4,076 holdings as of Jul. 31, 2022. They are composed of 69.5% large-cap stocks, 13.2% midcap, 7.2% small cap, 6% between small cap and midcap, and 4% between midcap and large cap. The average market cap within the fund is $481.5 billion.

VTI is an attractive option as a foundation for an Ally Roth IRA because it is an inexpensive and broad stock fund. Many investors may find that an ETF like VTI is sufficient to build a long-term portfolio for retirement. There are other funds at a similar price point that offer alternatives for investors, such as the Schwab U.S. Broad Market ETF (SCHB) and the iShares Core S&P Total U.S. Stock Market ETF (ITOT). But VTI has the widest range of exposure to different stocks.

Investors have other options when it comes to broad stock funds. They also can focus on a large-cap ETF, such as the iShares Core S&P 500 ETF (IVV), as their primary fund, and supplement that with a specific small-cap or midcap fund to broaden their exposure. The Schwab U.S. Large-Cap ETF (SCHX) tracks the Dow Jones U.S. Large-Cap Total Stock Market Index, which has wider coverage than the S&P 500, making it another good alternative. A third option is the BNY Mellon U.S. Large Cap Core Equity ETF (BKLC), a free large-cap fund but on a newer proprietary index called the Morningstar U.S. Large Cap Index. BKLC has about half the holdings of S&P 500 ETFs, but its lower fees may make this narrower large-cap fund attractive to some investors.

A broad-based equity fund like VTI carries a certain degree of risk, but it also provides investors with fairly strong growth opportunities. For many investors, this ETF may act as the foundation of a well-diversified investment portfolio. However, for those with a very low risk tolerance or who are approaching retirement, a more income-oriented portfolio may be a better option.

BNY Mellon Core Bond ETF (BKAG)

• Expense Ratio: 0.00%
• Assets Under Management: $363 million (August 15, 2022)
• One-Year Trailing Total Return: -9.27% (as of August 15, 2022)
• 12-Month Trailing (TTM) Yield: 1.84% (August 15, 2022)
• Inception Date: April 22, 2020

BKAG is an ETF that seeks to track the Bloomberg Barclays U.S. Aggregate Total Return Index. This index gauges the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market.

BKAG offers broad exposure to the U.S. bond market at a 0 percent expense ratio, so investors will not find a cheaper alternative. The fund is managed by Nancy G. Rogers and Gregory A. Lee, both of whom have advised the fund for two years.

BKAG has more than 2,415 holdings as of Jul. 31, 2022. The largest allocation of holdings, about 40.4%, are Treasurys, followed by 27.8% for agency fixed-rate bonds. The remaining roughly 32% of holdings are bonds or other debt securities issued by entities operating in the following market sectors: banking, consumer noncyclical, communications, technology, energy, electric, consumer cyclical, and capital goods.

Broad-based bond or fixed-income funds generally carry lower levels of risk compared with equity funds. Along with lower risk, though, bond funds don’t provide the same growth potential, which means typically lower returns. These funds may appeal to risk-averse investors and as a tool to diversify a portfolio.

According to modern portfolio theory, risk-averse investors will find that investing in both a broad-based bond fund and a broad-based equity fund provides substantial diversification to a portfolio. It is an approach that tends to maximize returns while minimizing risks.

Conventional wisdom in recent decades has been that the best portfolio is one composed of 60% stocks and 40% bonds. But in fact, this ratio is highly variable. Many investors have taken to holding a larger percentage of stocks as a way of enhancing potential returns while increasing risks only marginally. Investors far from retirement may opt for a more stock-focused approach, while those nearing retirement may shift the balance toward bonds. Investors should always consider their own financial needs and appetite for risk before making any investment decision.

Frequently Asked Questions

The Bottom Line

A Roth IRA offers investors certain tax advantages. Roth IRAs are unique in that they are funded with after-tax dollars and are not taxed when the funds are withdrawn at a later date. In short, funds invested in a Roth IRA can grow tax free. After opening a Roth IRA, the types of investments chosen will depend on the individual investor’s risk tolerance and how much time and energy they have to research various investments.

For investors with little time and energy, one option is to go with a few large and diversified funds, allocating part of their money to a broad-based stock fund and another part to a broad-based bond fund. These large, diversified funds also may create a solid foundation for many investors who do have the extra time and energy to evaluate other, sometimes riskier, investment options involving investments in individual companies or specific niches of the market, such as small-cap stocks.